StarHub Limited - Triple Whammy, Only Enterprise Shines

Switching from fixed to variable dividend policy and to at least pay 80% of net profit each year. Cuts dividend to 9 cents per share from current 16 cents.

We revised our FY19e EBITDA and net profit downwards by 12% and 16% respectively due to the results. Downgrade to NEUTRAL with a lower target price of S$1.58 (prev S$1.88).

The Positives

Solid growth from enterprise.

The segment enjoyed a revenue growth of S$70.3mn (16% y-o-y). The growth is attributed by higher contribution from managed services where there is higher demand for cyber security, cloud, cryptographic and digital solutions. The cyber security business contributes 7% of enterprise revenue and turned EBITDA positive in FY18. The S$30mn cost savings as part of the restructuring exercise is likely to flow back into Ensign as cyber security is labour intensive.

We expect enterprise to continue its growth momentum in FY19 as more resources are channelled into the segment.

The Negatives

Triple whammy.

Revenue from mobile, pay-tv and sales of equipment declined.

Mobile revenues decreased 14% y-o-y in 4Q18. We observe a 10% decline in mobile post-paid ARPU from a year ago as consumers continued the shift from traditional bundled plans to sim-only plans. StarHub added 34,000 post-paid customers a dismal amount compared to its competitors M1 (91,000) and Singtel (112,000).

Sales of equipment revenue declined S$33.9mn (17.3%) this is due to lower handset sales.

Outlook

We think the change in dividend policy may be a positive in the long run, as it puts less strain on StarHub’s balance sheet and allows management to put additional resources into the enterprise segment. That being said management have affirmed that they are not turning their back on the consumer segment, but to manage for better yield through cost optimisation and retention of high value customers.

We expect cost of services to increase as the migration of HFC customers to fibre continues.

The pay-tv segment could see a change in cost structure as there are content contracts up for renewal that will change from fixed to variable.

Downgrade to NEUTRAL with a lower Target Price of S$1.58 (prev S$1.88)

We revised our FY19e EBITDA and net profit downwards by 12% and 16% respectively due to the results.

Downgrade to NEUTRAL with a lower target price of S$1.58 (prev S$1.88).

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